As part of the ongoing hearings on Senate Bill (SB) 192, the Senate’s oil tax bill, this week the Senate Finance Committee spent considerable time discussing a proposed alternative to the state’s current progressivity tax on oil production. Progressivity, which increases the amount of tax owed by an oil company as the price and profit from a barrel of oil increases, is generally agreed to be the part of the state’s oil tax regime most in need of adjusting.
Progressivity as written is calculated based on the net profit on a barrel of oil, meaning the market price of a barrel of oil minus all costs associated with producing and transporting that barrel to market. The alternative progressivity option being discussed would be calculated on a gross production value, meaning it would be based solely on the market price of a barrel of oil less royalties.
Basing progressivity on gross value rather than net profit value allows for two key advantages: a simpler framework to incentivize new oil production and a de facto “decoupling” of oil and gas taxes.
Incentivizing new oil production above and beyond current levels will require an “all-in” approach where different types of oil fields – the existing giant “Legacy” fields as well as new oil fields currently being explored and developed – and eventually different types of oil resources, like heavy oil and shale oil, will need to be selectively incentivized by tailoring tax rates specifically to each type of production.
The Governor’s proposed House Bill 110 incentivizes new oil production by lowering the progressivity rate for oil produced from new fields. Under the current net profit-based progressivity tax, this would lead to what’s known in tax terms as “ring-fencing,” where old and new oil fields, because of their distinct tax rates, would require separate tracking of production costs and the filing of separate tax returns. This would create an additional administrative burden for both the oil producers and the state tax accountants and add considerable complexity to an already complex system.
Replacing the current net profit-based progressivity with a gross-based progressivity eliminates the problem of “ring-fencing” and allows for the targeting of different tax rates for different types of new oil production.
A gross-based progressivity also addresses a problem created by the state’s current combined oil and gas tax. If and when a gasline is built and material quantities of Alaska’s natural gas are brought to market, because of the way the production tax is currently written and the complex interplay of high-value oil with low-value gas, the state could end up losing close to two billion dollars. Making progressivity gross-based rather than net profit-based simply and elegantly addresses this unwanted “dilution” effect and ensures that the state gets fair value for its natural gas.
I look forward to further discussion and analysis of this new progressivity model and other key provisions of the oil tax bill as the Senate Finance Committee continues its discussion of SB 192 next week.
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